The Impact of Bond and Share Offering Announcements on Share Market Prices A Study of the Nairobi Stock Exchange Efficiency

Abstract

An efficient market is one in which prices fully reflect available information. An implication of an efficient market is that no excess abnormal returns can be earned from this information because current prices already reflect the information. The overall objective of this study was to test whether the Nairobi Stock Exchange efficiently reacts to bond and share offering announcements in share price adjustments. Other objectives were to analyse descriptive properties (average and variability) of daily stock returns and to determine the nature of bond and share offering announcements for investors at the NSE. This study used daily data on the Nairobi Stock Exchange. The total number of announcements observed in the Market Fact of the Nairobi stock Exchange from January 2002 and December 2006 was 33. The study covered seven cases of bond (medium-term note) and share offering (rights and bonus issues) announcements during this period. To find out the immediate reaction to bond and share offering announcements, the researcher used the mean-adjusted returns model as defined by Brown& Warner (1985) to calculate the abnormal returns and tested the average event-day abnormal return at a 5% level of significance. The test result did not provide sufficient evidence to believe that the NSE was not semi-strong efficient in relation to bond and share offering announcements released by the listed companies. Hence, analysis of CAARS of the NSE in relation to bond and share offering announcements was made to detect any abnormal reactions namely early responses, overreactions or delay in the adjustments to both types of information under study. Results revealed information leakage prior to the event announcement, which was slowly overrated by investors before a share price reversion that persisted to the end of the event period. This points to the fact that the Nairobi Stock Exchange was not semi-strong efficient in relation to bond and share offering announcements made by listed companies. To enhance the efficiency of the NSE, the researcher proposes an increase of the number of shareholders, timely and accurate Abstracts 115 information disclosure, development of information communication promotion of the competitive activities of security analysts, reduction inside trading and development of the stock exchange infrastructure.